Gain & Loss Analysis -- Who Cares?

Well, of course, we do. Anyone who has the good fortune to get a Lohmann
International Retirement plan valuation report knows the lengths we go to.
We feel that the liability gain & loss is the only way to determine the
appropriateness of the major actuarial assumptions affecting the PBO, other
than the discount rate.

Early on, we got involved in a case where the then current person
responsible for the FAS 87 actuarial valuation had done a geometric average
of the seniority increases implicit in the current employee structure.

They had recommended a salary scale that was several (!!) percentage points
higher than the suggested discount rate (yes, whole points). The client
called us in for help. We, watching the cost/benefit ratio, suggested that
they use a salary scale that was more in line with local conditions and that
we would do the valuation two years in a row to judge the reasonableness of
the assumption.

The auditor agreed to our approach, it being cost-effective. He also felt
he could rely on our work. The bottom-line was as expected: there was no
significant deviation in experience from that expected with a "reasonable"
salary scale. Our gain & loss analysis isolated the exact impact of the
change in liabilities due to changes in the salary scale other than
expected. It was essentially zero!

We break out the actual experience with regard to aggregate retirements and
new employees also, as a matter of course, beginning in our second valuation
for the same client.

When assumptions change, we isolate each one so that estimates of the
impacts of other choices can more easily be made. It is one thing to talk
about the relationship of the discount rate and salary scale, it is quite
another to see it in action! If called on, we can isolate the effect of
each decremental force assumed. Very important when a client is managing
his largest employee cost after payroll.

One final benefit of gain & loss analysis is the increase in the auditor's
ability to rely on our work, thus, saving you money on your audit. Fewer
questions about the actuarial report on the FAS 87 valuation translates to
fewer charged hours by the auditor staff. Fewer charged hours ultimately
saves you money!

Salary Scale Example ... What's Wrong with Geometric?

Japanese seniority scales tend to provide fairly healthy,
better-than-average increases in the early years of a new employee's career.
Increases decrease significantly as the employee passes mid-career,
disappearing entirely and sometimes becoming negative after the employee
reaches the "age limit."

The age limit is a distinctive (compared to North America) element of
Japanese lifetime employment. It is the age at which the company may
unilaterally stop increasing an employee's pay and, even, decrease it. It
is not the "Normal Retirement Age" and often occurs about five years before.

Obviously, the older, longer-service employees contribute the most to the
liabilities of the retirement plan. The younger ones contribute almost
nothing. The liability-weighted salary increase is strongly affected by the
small increases given senior workers and hardly affected at all by the large
increases given the younger ones.

A geometric average does not properly weight the increases by plan liability.

The Vesting Normal Cost

In order to project the minor "BO's," one needs the normal cost and expected
benefits for each. Once you have these, the gain & loss can be extended to
the minor "BO's." While we don't often recommend the extra expense, such an
analysis might be useful when a company has found itself hit with an
"Additional Liability" due to changes in the liability side of that
equation. The normal cost we develop for the VBO (Vested Benefit
Obligation) is affectionately called the "Vesting Normal Cost." It is
precisely what allows a proper tracking of the relationship of the VBO to
the ABO. Because of unusual vesting patterns in Japan, the overall vested
ratio can change significantly from year-to-year.

That said, we are still struggling with trying to properly define the VBO
for Japanese-style plans. The combination of lump-sum payout and full
vesting for involuntary termination combine to muddy the definition waters.